ValuePickr Forum

Infinite Computer Solutions

Scrip Code : 533154
Industry : IT Consulting & Software

Current Price- 94 Rs

Market Cap- 413 crs

Would like to draw your attention to this mid-cap IT player.

What's so Good?

1) Company is selling at less than half of its IPO price (2 years ago) & less than its buyback price (1 year ago).

2) Selling at P/E of less than 4 (EPS 28/- for FY12) and dividend yield of 8-9% (Rs 8.5 full year dividend)

3) High ROE (20+%) consistently over the years.

4) FY13 guidance of 20% growth & EPS of 34 Rs. ( Dividend policy of 30% makes dividend yield of more than 10% in FY13).Exceeded guidance in FY12.

5) Cash more than debt ( 150 crs v/s 60 crs).

5) Insiders buying.

Risks-

About 60% revenues from Telecom clients. Any big negatives surprises may hurt.

However, I see major risks 'priced in' in current market price.

Am I missing something?

Should be good to investigate more.

There is value in IT small and midcap space. Infinite Computer, Persistent Systems, RS Software are among the names quoted by many of my friends - they seem to have some niche of their own.

Thanks for bringing this up Jatin. Let’s dig deeper to establish differentiators and Value!

-Donald

I hold RS Software and Infinite as well. In the last decade with the big 4 IT growing at decent pace probably there wasn’t a case for looking at smaller folks. But now for the big 4 things looking not so good probably the contra bet can be these smaller folks who are debt free, good ROEs, low PEs. Apart from the names that Donald mentioned I think Zensar and Zylog systems are also interesting. Even Sasken and Nucleus Software hold significant cash. Obviously the important aspect here would be identify corporate governance also as there have been IT folks who have taken folks for a ride.

As far as I see Infinite it should be doing well in FY13 as they have been added a few clients. The profit and revenue guidance for them has been at a dollar value of 52, any rise in dollar would change these numbers. They pretty much did well with their FY12 guidance and the actuals.

Also as far as I have seen the communication from mgmt in press the guidance does not take into account any new clients being added. This can also happen as they are in talks with a few folks.

I would try to attend RS Software AGM whenever that happens. The major overhang is that their major revenues come from one client - Visa. But the reserves/cash are good and those would be probably put to use once the promoter gets his stake to a decent number. It had come down as they were a debt laden company in 2005/06 and then restructured.

Agree with you guys on RS & Persistentas well !!!

Seems like good bets with decent management.

Regrading RS, what they actually do? I mean is that a fixed rental kind of business or they need to keep developing new & better applications for payment industry clients?

@ Saurabh- Do post meeting notes of AGM. Should bein next month.

Hi

Infinite looksridiculouslycheap at these levels - given the high dividend yield, decent returns andnegligibledebt. Few concerns and reasons I can think of poor valuation:

  1. The buy back seemed to be a bit of a dampener. The stock wasn’t exactly that cheap when they announced the buy back and maximum price was also too steep at 230. There would always be question marks if a company comes and does a buy back just an year after going public.
  2. Plus they stopped the buy back in between and there were some investor concerns why stop the buy back when the prices have actually fallen. Then management gave in and again started the buy back.
  3. The timing of buy back was to coincide with their top client not giving them business and transferring business to its own captive unit in India. So the entire buy back move may be was supposed to instill confidence in investors in the face of some bad news.
  4. Their guidance had to be revised for FY 2012 given that their top client moved away.
  5. Attrition is also a bit of issue here, the work force has reduced quite a lot in FY 12, but there have been decentexplanationgiven by the management to justify that.
  6. Do they actually hold so much cash (150 cr plus)? Is it for real? Most of it is supposed to be in fixeddepositsearning very little return. Would be interesting to see from Annual Report how much they earned on this cash pile. The quarterly results don’t give that info.

All in all, I think the business is doing well and concerns are more of secondary in nature. The Management has been honest in their guidance and communication to investors is also pretty exhaustive. The Business prospects seem to be good so far. The investor community is paying much more heed to these secondary concerns instead offocusingon the business fundamentals.

I also am tracking midcap & small cap IT stocks. With the rupee depreciation, high cash levels in the books, and some of them differentiating themselves by focusing on a niche, they seem to be good area to look for returns.

I am currently tracking Sasken, Polaris & Thinksoft.

Another stock to track in Midcap IT is Thinksoft. The stock has recently moved up 30%, but still on a consolidated basis it has a dividend yield of 8%.

The positives as per me are

  • Niche of Third Party Software Testing in the BFSI Space
  • Cash of Rs 40 per share and CMP is Rs 64
  • Dividend of Rs 5 (2 Interim & 3 Final)
  • The promoter is on record that they will beat the industry dollar growth rate. So I anticipate Dollar Growth of 15-20%
  • The margins were low, as the utilisation levels were pretty low. Now the company is gaining traction especially in US and Far East
    • The promoters have fairly good reputation

The one big Negative is that

  • The IPO came in Sep 2009 and there is this talk in the market that an operator took over the scrip and made it rise as high as Rs 500. I have spoken to the promoters and their version is that they had nothing to do with it. It could be that the exiting shareholder - EurIndia had a role to play in it. That part is open to debate and further research, but I do feel that this perception issue is reflected in the price

Hi Gaurav,

Thinksoft is also an interesting stock. However one reason I dropped it against RS Software and Infinite is because it is testing which typically is not a very differentiating or high end kind of stuff in IT. And thus the advantage would typically only be in terms of cost and probably domain knowledge which anyways might not be a big moat. And in terms of people the other IT cos have better profiles typically.

Hi Gaurav,

Thinksoft is also an interesting stock. However one reason I dropped it against RS Software and Infinite is because it is testing which typically is not a very differentiating or high end kind of stuff in IT. And thus the advantage would typically only be in terms of cost and probably domain knowledge which anyways might not be a big moat. And in terms of people the other IT cos have better profiles typically.

Flat numbers in USD terms, good numbers in Rupee terms.

SPA has raised target from 190 to 206 in the latest report.

Promoters have been buying consistently in the last quarter. Cash levels at Rs. 183 cr or Rs. 43 per share.

Looks good so far.

From My Blog-

Infinite Comp: Value Investors’ Delight

What would a value investor ask from his picks (at the time of deciding whether to buy or not)?

1) UNDERVALUATION

He would want his picks to be undervalued- i.e marketprice to be much less than the value of the stock. For a 100 Rs value, he would want market price to be Rs 40-50 or less.

  1. CATALYST
    To bring market price to intrinsic value, there should be some catalyst (in the future) to trigger the change.
    Just because its very difficult to tell when & how the catalyst will come, value investors practice diversification. And in absence of that catalyst, we will end only with Value Traps (cheap stocks which will remain forever cheap).

Let me explain with a live example- Lets say I buy an NBFC stock selling at Rs 27/- each. Now, the book value is Rs 140/- per share. The business is making Rs 9-10 EPS per year. So, from this knowledge, with a P/B of 0.2 & P/E of 3, the stock seems undervalued. What if I say two more things-

  1. The business did a buyback 2 years back at Rs 133 per share.
  2. The promoters have injected their own money into the business at Rs 45 per share recently.

So this satisfies my criteria 1- It is undervalued. I will easily value it at 60-70 Rs per share.
But for it to move to its true value, it will need a catalyst- Earnings jump/ Dividend/ Buyback/ More visibility.
Till then it will remain undervalued & the opportunity cost will hurt me.

What if a stock satisfies both the criteria- Undervaluation & a VisibleCatalyst?
That will be the time to say ALL IN for a poker player, I guess.

Years ago, Prof Bakshi found a hugely undervalued stock which he loaded & then **he became his own catalyst.**I guess with catalyst in sight you can afford to do that- ALL IN !!!

Here is an undervalued business which comes with its own catalyst- Infinite Comp Solutions

Why is it Undervalued?
At 120 Rs per share, the stock is selling at 4.2 times FY12 earnings. The business is asset light, generates enough free cash flows & management has given a 20% growth guidance for FY13. Insiders are buying the shares from the open market. 1Q13 results were good.
In nutshell,a 20% growing businesshavinggood ROCE is cheap at 4 PE.

Where is the Catalyst?
The catalyst is the **Dividend. **The management has clearly announced a policy of giving 30% of net profits to shareholders as dividends.

At an EPS of 33-34 Rs for FY13, that would beRs 10 as dividend per share.The dividend yield works out to be a whopping 8.33%. {Remember the business is doing well, management is positive about the business, insiders are buying.}

If one can find 10-15 dividend yields of this quality, who needs a Fixed Deposit???

Risks)- The company caters majorly to Telecom sector & US based clients. If clients’ business faces a slowdown, Infinitewill feel the heat. However, risks are overhyped at current price, in my view.

Fair Value)- I would value it at around Rs 230-260 (Rs 33 EPS * 7-8 PE). Hence, I expect it to double in next 4-5 quarters.

Biases that may have affected my thought process- Endowment Bias, Confirmation Bias. So, please do your own due-diligence.

2 Likes

After cursory look at this company, it looked to me as too good to be true. But then I heard that if there’s anything too good to be true then there is an element of pessimism and caution so decided to take a look at it in more detail.

They do have couple of subsidiaries in India and globally too and have corporate governance issue explained here:

http://www.equitymaster.com/outsideview/detail.asp?date=12/19/2011&story=3&title=Infinite-Computer-Infinite-possibilities

Then there are bad signal from their employees too over here :

http://www.consumercomplaints.in/complaints/infinite-computer-solutions-c274787.html

I think this is not the kind of bet to say ALL IN for poker player! You have to have very strong hands to say ALL IN and I never said it in playing poker so far :frowning: as I never got strong hands.

Yeah this looks “okay” to have very small bet of portfolio if somebody want to bluff as money has no colors either it’s made from quality stocks or by punting.

I do have reasons to believe that this company don’t have good working standards as I was also part of their team for providing solutions to one of their Telecom client.

Vipul,

I had never looked at the employee morale angle.Thanks for bringing this aspect to notice.

Regards

The stock has doubled from the time equitymaster wrote that note in dec11. Instead of going by what others write, lets analyse it on our own. When a company has multiple subsidiaries, not all subsidiaries raise their own capital. These are many a times funded by loans and advances from parent company. Hence, nothing wrong with low equity capital subsidiaries having high reveneues and profits.

Vipul,

The article in equitymaster was written in poor taste. The guy there takes even the logo of the company. Also he criticizes presence of a 73 year old director on board, not sure what he would say of Warren Buffet or some of the companies he holds. Or probably Jost’s engg which is run by AH Reporter who is 75 yrs old.

There have been couple of subsidiaries closed down in countries where the businesses take off. Most of the other subsidiaries are due to the fact that Infinite has grown through acquisitions and they have been kept as separate companies. Also the issues were raised before the company came up with their 30% dividend payout policy.

Regarding the website consumercomplaints or sites like glassdoor, you can check for other companies.:slight_smile:

Today’s ET as listed this amongst the cheapest stock based on forward PE.

Any idea how does Infinite computer compares with other mid cap IT companies like RS software, Zensar Tech?

Infinite probably is the cheapest currently with guidance of 30% projected growth in INR revenues and 20% in INR bottomline. And a dividend policy of 30% payout declared. It fell quiet from highs after a IPO and hence has a negative perception. They have dependance on telecom vertical. Also they have mobility solution in partnership where revenue sharing is there. They do revenue sharing projects as well. Q4 FY12 results had been bad as one of the BOT projects had moved out and other issues. There is a RARDP project revenue of 60 cr to be booked which I think should hit the bottom line when it comes.

RS Software is a risky bet and has significant dependance on Visa for its financials. It has added 2 clients and has been improving numbers over the last couple of years. It is a turnaround and started paying dividends last year and also became debt free last year. They focus on payments domain.

Zensar tech has been dependant on Cisco earlier and has benefitted when one of the vendors was removed. They also have revenues from other clients and targets to be a 1b USD organization in 5 yrs(or might be lesser - writing from memory).A RPG company and one of the reasons don’t like them as they have not been very effective wealth creators. It anyways is bigger than the other two.

Hi Hitesh/Donald,

Are you tracking Infinite/RS Software/Zensar any chance? What is your view regarding them?

hi subash,

Not too much idea about either of stocks you mentioned.

Zensar looks extremely cheap on the conventional PE basis.

The stock seems to be gathering market fancy and has already moved from 100 odd to nearly 150 in past few months. However, whats the outlook on these stocks post their sharp run in context with the dollar depreciation?

What I mean to to say is- are the current prices factoring in the impact of dollar depreciation/forex losses etc for these mid-sized cos., coz the dollar revenue growth may get significantly impacted going forward?

Also if you could pls highlight how we should look at hedged/unhedged portion of dollar revenues and its mention in AR’s. (For newbies like me who don’t understand I.T much)

Thanks to Jatin for bringing the stock in front of us.

(Have been fortunate enough to enter @ Rs. 100-110 levels and still invested. :slight_smile: )

Hi Subhash/others,

why script is going down despite good results and mkt strength??

Hi Hitesh,

Can you please post technical view on this and best levels to avg down